Will I lose a lot of money by being a sole trader?

Hi,

I'm fairly new as a poster but I come here a lot to get info so hopefully someone can help.

I've been asked by my boss to set myself up as a sole trader. I've read of details about tax but I just have a straight forward question.

Is my net salary going to decrease by a lot if I'm a sole trader with regards to tax because I'd be taxed at 46% on all earnings as far as I can see.

All earnings except expenses from what I've read. But if I work at home with limited travel, then my expenses wouldn't be that high. So it seems to me that I'd be taxed at a higher rate on the majority of my earnings...

I'd appreciate any advice...

Sounds to me like your boss wants to evade tax. Will you have any other clients other than your "ex"-boss?

Maybe read this:
http://www.askaboutmoney.com/showpost.php?p=794054&postcount=2

If's it's not a tax evasion scheme on your boss' part, then you will pay more tax because you will lose the PAYE tax credit.

You'll be taxed through the rates at the same as anyone else. You do not get the PAYE credit though ( 1,830 pa ) as a sole trader. SO you get your tax credits then so much at 20% then bal at 41%. You also pay PRSI at 3% and 2% Health Contribution and the new 1% levy if your income meets the thresholds.

However what's interesting is you say your boss has asked you to set up as a sole trader. Presumably that means you are already an employee ? There are rules on what constitutes a self-employment and an employment and while some jobs merit one style or the other, there are some instances where you cannot realistically be a sole-trader. e.g. a barman.

Sometimes people are put into sole-trader as ways of the employer avoiding holiday pay, employers PRSI and other statutory rights of employees. It would be important to check carefully before any move.

I's suggest you check out Revenue.ie where there is a lot on self-employment.

That's very interesting. They first asked me if I wanted to work from home 4 days a week but then yesterday they said that their insurance doesn't cover that so would I consider becoming a contactor and that they'd pay me my gross salary /12 months. They'd be my only client.

I'm just starting to look into this sole trader situation today but it seems I'd be better off as a employee...

if you leave the job and set yourself up as a sole trader, what are you goin to do if your former employer says they no longer require your services? in this climate i'd try and hold onto my job!

I don't know the in's and out of it but it isn't a good idea for your employer either. All I know is that a policy was brought in a couple of years ago in our place telling people not to engage sole traders or past employee's as there is a loop hole in the employment law that leaves a company open to all sorts of things.

Basically if you were an employee of their's and now you are a sole trader working for them exclusively you can be deemed by law to be an employee still as the link hasn't been broken. I am no tax or employment law expert but I know our tax section took it very seriously and it is a complete no no in our company. If we have no alternative to this person we have to get it vetted by the tax section to see if it is okay. They check things like if sufficent time has elapsed between now and when the sole trader worked for us, we can't be their only client, they must provide some proof the revenue has them on 'their books' like a tax clearance cert., registered business name, registered vat number etc.

If you don't like what your boss is suggesting it is worth pointing this out to him as he could end up worse off than he is now. You would still be considered an employee of his by law and if you mess up your taxes etc or they think he is avoiding employers PRSI etc it could end up costing him a fortune in penalties etc.

You may not lose money now but you do lose a lot of rights and entitlements particularly in relation to job security and what happens if you become unemployed. You should look for a good severance lump sum if going this way!

You will also lose sick leave, paternity leave (assuming you are a man!), company pension (if one exists) (you'll have to start a PRSA or personal pension, but the company can't pay into it as you are no longer an employee.

Add to this, you may have to register for VAT, if you are over the threshold, and charge VAT on your services at 21.5%

You have no union, no rights to employee legislation, and probably a contract subject to termination at a month's notice without additional compensation. In any liquidation, I believe you are an unsecured creditor, so are low on the list of getting any amounts owed.

You will also have to wait until your invoice is processed to be paid - sixty or ninety days is usual for many companies in Ireland.

You will have the additional expense of being tax-compliant, probably about a grand a year in accountancy fees, VAT returns etc.

All in all, you would want to be looking for 30-40% more to be contract than employee and then be charging VAT on top of that (which goes to the government and can be claimed back by your employer, so nets off to zero for the two of you).

Finally, and this is, to my mind the worst of all, you lose your rights to jobseekers benefit as you will only be paying class S PRSI. This will mean you are means tested on any benefit you get and if anyone who lives in your household is employed or even on other benefits (I believe) their means are taken into account before you get anything. There is a list of benefits available to class A PRSI vs. class S - you should look at it to see what you will not be entitled to.

This is in addition to the other things above, all of which apply, as far as I can see!

I don't mean to scare you, but there are a lot of pitfalls to being self-employed that you should know about up front. I could never advise anyone to become self-employed by choice in hard times.